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Choosing investment wrappers

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The withdrawal of indexation allowance for individuals and trustees ... Top-slicing can NEVER be used for age allowance purposes ... – PowerPoint PPT presentation

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Title: Choosing investment wrappers


1
Choosing investment wrappers
  • Chair Liz HendersonTaxation and Trusts
    Specialist, James Hay
  • Brian Murphy ACII, APFS, ATT, TEPHead of Tax and
    Trusts, AXA Life

2
Capital Gains Tax the reform
  • A single rate of CGT at 18
  • The withdrawal of taper relief
  • The withdrawal of indexation allowance for
    individuals and trustees
  • Measures came into effect for disposals made on
    or after 6 April 2008
  • Is this really a new idea?

3
CGT and investments
Basic rate taxpayers
A 10 reduction in the rate of CGT from 20 to
18 .
. Or is it really a possible 50 increase in the
rate ?!
4
Impact of the loss of taper relief for
investments held by basic rate tax payers
5
Impact of the loss of taper relief for
investments held by basic rate tax payers
6
Impact of the loss of taper relief for
investments held by basic rate tax payers
7
Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
8
Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
This represents a potential reduction in the tax
rate for higher rate tax payers and trustees of
anything between 25 and 55
9
Types of tax wrapper
  • Onshore life bond
  • Offshore life or capital redemption bond
  • UK collective (dividend paying)
  • UK collective (interest paying)
  • Offshore collective (distributor dividend
    paying)
  • Offshore collective (distributor interest
    paying)
  • Offshore collective (non-distributor roll -
    up)

10
Factors to consider
  • Asset allocation
  • Internal taxation of the wrapper
  • External taxation of the investor

11
Onshore bonds the funds
  • The headline tax rate for a life fund is 20, but
  • This rate is not applied to all investment return
    components
  • The 20 tax rate can apply to all or none of the
    investment return or a combination.

12
The tax analysis
13
Other tax aspects
  • Stamp Taxes
  • 0.5 on UK equities
  • Up to 4 on real estate
  • Realisation Basis
  • Tax on growth in excess of RPI on equities and
    real estate deferred until point of sale
  • Tax relief for expenses

14
AXA Distribution Fund - historic tax profile
2007 2006 2005 2004 2003
Tax charge () 7.49 8.77 12.36 11.98 6.55
15
Onshore bonds - investors
  • Investors receive a notional basic rate tax
    credit of 20
  • Higher rate tax payers have to pay a further 20
    of the net gain (maximum net rate is thus 36)
  • No additional liability for basic rate tax payer
  • Non tax payer and 10 tax payer cannot reclaim
    any tax
  • Top slicing relief available

16
Offshore bonds the funds
  • Life company generally pays no tax within the
    fund
  • May be some non-reclaimable withholding tax

17
Offshore bonds - investors
  • The gain is taxed at the investors highest
    marginal rate
  • Higher rate tax payers pay 40
  • Basic rate tax payers pay 20
  • Non tax payers and 10 tax payers can use up
    those thresholds
  • Top slicing relief available

18
Top-slicing issues
  • On final encashment of both onshore and offshore
    bonds, the top-sliced divisor is the number of
    complete years that the bond has been in force
  • Top-slicing is only ever used for higher rate tax
    purposes
  • Top-slicing can NEVER be used for age allowance
    purposes

19
Top-slicing issues - Onshore v Offshore
  • For onshore bonds, on part surrenders, the
    top-sliced divisor is taken from the date of the
    last chargeable event
  • - e.g. if, 7 withdrawals are taken each
    year, the top-sliced divisor will always be one
  • For offshore bonds, if 7 withdrawals are taken,
    top-slicing always goes back to the start date of
    the original bond, so the top - sliced divisor
    increases each year

20
UK collectives the funds
  • Funds are exempt from UK tax on gains within fund
  • UK dividends not liable to tax within fund
  • Funds liable to 20 corporation tax on other
    types of investment income
  • May be non recoverable overseas withholding tax
  • Funds with more than 60 interest bearing assets
    pay interest
  • Funds with less than 60 interest bearing pay
    dividends

21
UK collectives investors
  • Dividend distributions are paid net of the
    notional 10 tax credit
  • Higher rate tax payers pay a further 25 of the
    amount received
  • Basic and starting rate tax payers have no more
    tax to pay
  • Non taxpayers cannot reclaim the tax credit
  • Income tax payable whether dividend reinvested or
    not

22
UK collectives investors
  • Interest distributions have 20 tax deducted at
    source
  • Higher rate tax payers pay a further 20 of the
    grossed up distribution
  • Basic rate tax payers have no more tax to pay
  • Starting rate and non taxpayers can reclaim the
    tax deducted up to the thresholds
  • Income tax payable whether dividend reinvested or
    not

23
UK collectives investors
  • Capital gains taxed at 18 flat rate for all
    individuals and trustees
  • Annual CGT allowance (9,600 for 2008/9 may be
    available).
  • Trustees get a maximum of half this allowance
    care re life policy trusts and pensions trusts

24
Offshore collectives the funds
  • The fund will generally pay no tax
  • There may be some non-reclaimable withholding tax

25
Offshore collectives investors distributor
funds
  • A distributor fund must distribute at least 85
    of its income
  • Offshore fund dividend distributions are taxed at
    10 for basic rate tax payers and 32.5 for
    higher rate tax payers
  • Interest distributions are taxed in the same way
    as for UK collectives
  • Capital gains are taxed at 18 and the CGT annual
    exemption may be available

26
Offshore collectives investors non
distributor funds
  • Gains are charged at the investors highest
    marginal rate
  • A higher rate tax payer pays 40 tax on gains and
    interest received and 25 on dividends received
  • Basic rate tax payers pay 20 on any capital
    gain, 20 on interest received and nothing on
    dividends received
  • Non and starting rate tax payers can use up their
    allowances
  • There is no top slicing relief

27
So, what wrapper?
  • Know your client and his or her attitude to risk
  • Asset allocation different wrappers for
    different asset classes?
  • Does your client need an income or is capital
    growth the priority?
  • What is your clients current tax rate?
  • What is it likely to be when the investment is
    realised?
  • Death?

28
Factors to consider - bonds
  • Tax deferral 5 withdrawals
  • Assignment of the investment
  • Segmentation
  • Switching how important
  • Simplicity
  • Age Allowance
  • Long term care
  • IHT planning
  • Residency
  • Trustees of Discretionary (or A M) trusts

29
Factors to consider - collectives
  • The CGT annual exemption
  • Part disposals
  • Assignment of the investment
  • Switching how important
  • Simplicity
  • Residency
  • Trustees of Interest in Possession trusts

30
A final thought.
Change is inevitable except from a vending
machine
Robert C Gallacher
31
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